CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
CONTENTS
Report of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated Financial Statements:
|
|
|
|
Consolidated Balance Sheets - As of December 31, 2013 and 2012
|
F-3
|
|
|
Consolidated Statements of Income and Comprehensive Income -
|
|
For the Years Ended December 31, 2013 and 2012
|
F-4
|
|
|
Consolidated Statements of Changes in Stockholders’ Equity -
|
|
For the Years Ended December 31, 2013 and 2012
|
F-5
|
|
|
Consolidated Statements of Cash Flows –
|
|
For the Years Ended December 31, 2013 and 2012
|
F-6
|
|
|
Notes to Consolidated Financial Statements
|
F-7 to F-27
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Cleantech Solutions International, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Cleantech Solutions International, Inc. and Subsidiaries (the "Company") as of December 31, 2013 and 2012 and the related consolidated statements of operations and comprehensive income, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cleantech Solutions International, Inc. and Subsidiaries as of December 31, 2013 and 2012 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
/s/ RBSM LLP
New York, New York
March 28, 2014
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,114,873
|
|
|
$
|
1,445,728
|
|
Restricted cash
|
|
|
687,353
|
|
|
|
-
|
|
Notes receivable
|
|
|
703,718
|
|
|
|
88,029
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
15,234,863
|
|
|
|
10,078,623
|
|
Inventories, net of reserve for obsolete inventory
|
|
|
4,733,558
|
|
|
|
5,897,555
|
|
Advances to suppliers
|
|
|
695,254
|
|
|
|
593,104
|
|
Prepaid VAT on purchases
|
|
|
489,302
|
|
|
|
542,032
|
|
Deferred tax assets - current portion
|
|
|
253,173
|
|
|
|
-
|
|
Prepaid expenses and other
|
|
|
74,030
|
|
|
|
428,326
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
23,986,124
|
|
|
|
19,073,397
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT - net
|
|
|
70,595,138
|
|
|
|
59,436,100
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Deferred tax assets - net of current portion
|
|
|
1,222,216
|
|
|
|
551,890
|
|
Equipment held for operating lease
|
|
|
4,751,206
|
|
|
|
7,118,555
|
|
Land use rights, net
|
|
|
3,786,051
|
|
|
|
3,756,342
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
104,340,735
|
|
|
$
|
89,936,284
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Short-term bank loans
|
|
$
|
3,109,453
|
|
|
$
|
2,216,558
|
|
Bank acceptance notes payable
|
|
|
687,353
|
|
|
|
-
|
|
Accounts payable
|
|
|
4,961,555
|
|
|
|
5,474,479
|
|
Accrued expenses
|
|
|
899,816
|
|
|
|
986,824
|
|
Capital lease obligation - current portion
|
|
|
-
|
|
|
|
251,413
|
|
Advances from customers
|
|
|
1,455,740
|
|
|
|
1,851,987
|
|
VAT and service taxes payable
|
|
|
126,349
|
|
|
|
206,527
|
|
Income taxes payable
|
|
|
1,623,603
|
|
|
|
822,082
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
12,863,869
|
|
|
|
11,809,870
|
|
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES:
|
|
|
|
|
|
|
|
|
Capital lease obligation - net of current portion
|
|
|
-
|
|
|
|
132,756
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
12,863,869
|
|
|
|
11,942,626
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock ($0.001 par value; 10,000,000 shares authorized; 0 share issued and
|
|
outstanding at December 31, 2013 and 2012, respectively)
|
|
|
-
|
|
|
|
-
|
|
Common stock ($0.001 par value; 50,000,000 shares authorized; 3,503,502 and 2,894,586
|
|
shares issued and outstanding at December 31, 2013 and 2012, respectively)
|
|
|
3,503
|
|
|
|
2,894
|
|
Additional paid-in capital
|
|
|
31,532,308
|
|
|
|
28,987,128
|
|
Retained earnings
|
|
|
46,322,329
|
|
|
|
38,401,734
|
|
Statutory reserve
|
|
|
2,744,720
|
|
|
|
2,479,738
|
|
Accumulated other comprehensive gain - foreign currency translation adjustment
|
|
|
10,874,006
|
|
|
|
8,122,164
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders' Equity
|
|
|
91,476,866
|
|
|
|
77,993,658
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
104,340,735
|
|
|
$
|
89,936,284
|
|
See notes to consolidated financial statements
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
72,112,662
|
|
|
$
|
57,199,221
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
54,446,324
|
|
|
|
44,062,636
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
17,666,338
|
|
|
|
13,136,585
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
573,090
|
|
|
|
1,535,715
|
|
Impairment loss
|
|
|
2,573,256
|
|
|
|
2,206,253
|
|
Selling, general and administrative
|
|
|
3,126,992
|
|
|
|
3,050,911
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
6,273,338
|
|
|
|
6,792,879
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
11,393,000
|
|
|
|
6,343,706
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
22,287
|
|
|
|
11,384
|
|
Interest expense
|
|
|
(300,381
|
)
|
|
|
(305,659
|
)
|
Foreign currency gain
|
|
|
27,686
|
|
|
|
157
|
|
Warrant modification expense
|
|
|
-
|
|
|
|
(235,133
|
)
|
Other income
|
|
|
42,780
|
|
|
|
85,727
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense), net
|
|
|
(207,628
|
)
|
|
|
(443,524
|
)
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
11,185,372
|
|
|
|
5,900,182
|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES
|
|
|
2,999,795
|
|
|
|
1,701,602
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
8,185,577
|
|
|
$
|
4,198,580
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
8,185,577
|
|
|
$
|
4,198,580
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME:
|
|
|
|
|
|
Unrealized foreign currency translation gain
|
|
|
2,751,842
|
|
|
|
543,415
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
$
|
10,937,419
|
|
|
$
|
4,741,995
|
|
|
|
|
|
|
|
|
|
|
NET INCOME PER COMMON SHARE:
|
|
|
|
|
|
Basic
|
|
$
|
2.55
|
|
|
$
|
1.65
|
|
Diluted
|
|
$
|
2.55
|
|
|
$
|
1.58
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
|
|
Basic
|
|
|
3,210,791
|
|
|
|
2,538,246
|
|
Diluted
|
|
|
3,210,791
|
|
|
|
2,649,043
|
|
See notes to consolidated financial statements
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
For the Years Ended December 31, 2013 and 2012
|
|
|
Series A Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
Total
|
|
|
|
Number of
|
|
|
|
|
Number of
|
|
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Statutory
|
|
|
Comprehensive
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Reserve
|
|
|
Income
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
10,995,807
|
|
|
$
|
10,996
|
|
|
|
2,101,849
|
|
|
$
|
2,102
|
|
|
$
|
27,489,600
|
|
|
$
|
34,618,341
|
|
|
$
|
2,064,551
|
|
|
$
|
7,578,749
|
|
|
$
|
71,764,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
121,053
|
|
|
|
121
|
|
|
|
441,025
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
441,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred converted to common shares
|
|
|
(13,197,389
|
)
|
|
|
(13,198
|
)
|
|
|
439,912
|
|
|
|
440
|
|
|
|
12,758
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred issued for warrant modification
|
|
|
2,201,582
|
|
|
|
2,202
|
|
|
|
-
|
|
|
|
-
|
|
|
|
232,931
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
235,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
73,386
|
|
|
|
73
|
|
|
|
198,069
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
198,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock - related parties
|
|
|
-
|
|
|
|
-
|
|
|
|
157,966
|
|
|
|
158
|
|
|
|
612,745
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
612,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for adjustments for 1:10 reverse split
|
|
|
-
|
|
|
|
-
|
|
|
|
420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to statutory reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(415,187
|
)
|
|
|
415,187
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,198,580
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,198,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
543,415
|
|
|
|
543,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
-
|
|
|
|
-
|
|
|
|
2,894,586
|
|
|
|
2,894
|
|
|
|
28,987,128
|
|
|
|
38,401,734
|
|
|
|
2,479,738
|
|
|
|
8,122,164
|
|
|
|
77,993,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
578,916
|
|
|
|
579
|
|
|
|
2,388,010
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,388,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
30,000
|
|
|
|
30
|
|
|
|
157,170
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
157,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to statutory reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(264,982
|
)
|
|
|
264,982
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,185,577
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,185,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,751,842
|
|
|
|
2,751,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
|
-
|
|
|
$
|
-
|
|
|
|
3,503,502
|
|
|
$
|
3,503
|
|
|
$
|
31,532,308
|
|
|
$
|
46,322,329
|
|
|
$
|
2,744,720
|
|
|
$
|
10,874,006
|
|
|
$
|
91,476,866
|
|
See notes to consolidated financial statements
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
Net income
|
|
$
|
8,185,577
|
|
|
$
|
4,198,580
|
|
Adjustments to reconcile net income from operations to net cash
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
6,704,386
|
|
|
|
6,519,394
|
|
Amortization of land use rights
|
|
|
95,491
|
|
|
|
93,537
|
|
Increase (decrease) in inventory reserve
|
|
|
41,381
|
|
|
|
(37,882
|
)
|
Decrease in allowance for doubtful accounts
|
|
|
(628,188
|
)
|
|
|
(46,672
|
)
|
Loss on impairment of equipment held for operating lease
|
|
|
2,573,256
|
|
|
|
2,206,253
|
|
Loss on disposal of fixed assets
|
|
|
11,391
|
|
|
|
-
|
|
Warrant modification expense
|
|
|
-
|
|
|
|
235,133
|
|
Stock-based compensation expense
|
|
|
423,112
|
|
|
|
167,714
|
|
Changes in operating assets and liabilities:
|
|
Notes receivable
|
|
|
(604,798
|
)
|
|
|
(34,178
|
)
|
Accounts receivable
|
|
|
(4,126,440
|
)
|
|
|
(2,887,716
|
)
|
Inventories
|
|
|
1,303,519
|
|
|
|
(1,549,740
|
)
|
Prepaid value-added taxes on purchases
|
|
|
70,059
|
|
|
|
981,236
|
|
Prepaid and other current assets
|
|
|
91,666
|
|
|
|
(43,513
|
)
|
Advances to suppliers
|
|
|
(81,120
|
)
|
|
|
(371,849
|
)
|
Accounts payable
|
|
|
(1,809,914
|
)
|
|
|
438,945
|
|
Accrued expenses
|
|
|
(112,797
|
)
|
|
|
209,831
|
|
VAT and service taxes payable
|
|
|
(86,004
|
)
|
|
|
206,405
|
|
Income taxes payable
|
|
|
(129,378
|
)
|
|
|
(326,373
|
)
|
Advances from customers
|
|
|
(452,658
|
)
|
|
|
675,667
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
11,468,541
|
|
|
|
10,634,772
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
Purchase of property and equipment
|
|
|
(14,633,745
|
)
|
|
|
(10,744,247
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(14,633,745
|
)
|
|
|
(10,744,247
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
Principal payments on capital lease
|
|
|
(391,963
|
)
|
|
|
(246,485
|
)
|
Proceeds from bank loans
|
|
|
5,653,824
|
|
|
|
3,481,101
|
|
Repayments of bank loans
|
|
|
(4,846,135
|
)
|
|
|
(3,639,333
|
)
|
(Increase) decrease in restricted cash
|
|
|
(678,459
|
)
|
|
|
316,464
|
|
Increase (decrease) in bank acceptance notes payable
|
|
|
678,459
|
|
|
|
(316,464
|
)
|
Net proceeds from sale of common stock
|
|
|
2,388,589
|
|
|
|
-
|
|
Proceeds from sale of common stock - related parties
|
|
|
-
|
|
|
|
612,903
|
|
Proceeds from exercise of warrants
|
|
|
-
|
|
|
|
198,142
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
2,804,315
|
|
|
|
406,328
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS
|
|
|
30,034
|
|
|
|
(3,732
|
)
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(330,855
|
)
|
|
|
293,121
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS - beginning of year
|
|
|
1,445,728
|
|
|
|
1,152,607
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS - end of year
|
|
$
|
1,114,873
|
|
|
$
|
1,445,728
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
300,381
|
|
|
$
|
305,659
|
|
Income taxes
|
|
$
|
3,129,174
|
|
|
$
|
2,027,976
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
Property and equipment acquired on credit as payable
|
|
$
|
1,121,719
|
|
|
$
|
-
|
|
Series A preferred converted to common shares
|
|
$
|
-
|
|
|
$
|
13,198
|
|
Common stock issued for future service
|
|
$
|
-
|
|
|
$
|
281,265
|
|
See notes to consolidated financial statements
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Cleantech Solutions International, Inc. (the “Company”) was incorporated in Delaware on June 24, 1987 under the name of Malex, Inc. On December 18, 2007, the Company’s corporate name was changed to China Wind Systems, Inc., and on June 13, 2011, the Company’s corporate name was changed to Cleantech Solutions International, Inc. On August 7, 2012, the Company was converted into a Nevada corporation.
Through its affiliated companies and subsidiaries, the Company manufactures and sells forged products and fabricated products to a range of clean technology customers including high precision forged rolled rings and related products for the wind power industry and other industries and equipment to the solar industry. The Company also makes textile dyeing and finishing machines. The Company is the sole owner of Fulland Limited (“Fulland”), a Cayman Island limited liability company, which was organized on May 9, 2007. Fulland owns 100% of the capital stock of Green Power Environment Technology (Shanghai) Co., Ltd. (“Green Power”) and Wuxi Fulland Wind Energy Equipment Co., Ltd. (“Fulland Wind Energy”), which are wholly foreign-owned enterprises (“WFOE”) organized under the laws of the People’s Republic of China (“PRC” or “China”). Green Power is a party to a series of contractual arrangements, as fully described below, dated October 12, 2007 with Wuxi Huayang Electrical Power Equipment Co., Ltd. (“Electrical”) and Wuxi Huayang Dyeing Machinery Co., Ltd. (“Dyeing”), both of which are limited liability companies organized under the laws of, and based in, the PRC. Electrical and Dyeing are sometimes collectively referred to as the “Huayang Companies.”
Fulland was organized by the owners of the Huayang Companies as a special purpose vehicle for purposes of raising capital, in accordance with requirements of the PRC State Administration of Foreign Exchange (“SAFE”). On May 31, 2007, SAFE issued an official notice known as Hui Zong Fa [2007] No. 106 (“Circular 106”), which requires the owners of any Chinese company to obtain SAFE’s approval before establishing any offshore holding company structure for foreign financing as well as subsequent acquisition matters in China. Accordingly, the owners of the Huayang Companies, Mr. Jianhua Wu and Ms. Lihua Tang, submitted their application to SAFE in early September 2007. On October 11, 2007, SAFE approved their application, permitting these Chinese citizens to establish Fulland as a special purpose vehicle for any foreign ownership and capital raising activities by the Huayang Companies.
Electrical was formed on May 21, 2004, and Fulland Wind Energy was formed on August 27, 2008. Beginning in April 2007, Electrical began to produce large-scaled forged rolled rings that are up to three meters in diameter for the wind-power and other industries. In 2009, the Company began to produce and sell forged products through Fulland Wind Energy. Through Fulland Wind Energy, the Company manufactures and machines all forged products, including wind products such as shafts, rolled rings, gear rims, gearboxes, bearings and other components and finished products and assemblies for the wind power industry, and solar products, including large-scale equipment used in the manufacturing process for the solar industry. The Company refers to this segment of its business as the forged rolled rings and related components division.
Dyeing, which was formed on August 17, 1995, produces and sells a variety of high and low temperature dyeing and finishing machinery for the textile industry. The Company refers to this segment as the dyeing division.
Basis of presentation
The Company’s consolidated financial statements include the financial statements of its wholly-owned subsidiaries, Fulland, Green Power and Fulland Wind Energy, as well as the financial statements of the Huayang Companies, Dyeing and Electric. All significant intercompany accounts and transactions have been eliminated in consolidation.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of presentation (continued)
Pursuant to Accounting Standards Codification (“ASC”) Topic 810, the Huayang Companies are considered variable interest entities (“VIE”), and the Company is the primary beneficiary. The Company’s relationships with the Huayang Companies and their shareholders are governed by a series of contractual arrangements between Green Power, the Company’s wholly foreign-owned enterprise in the PRC, and each of the Huayang Companies, which are the operating companies of the Company in the PRC. Under PRC laws, each of Green Power, Dyeing and Electrical is an independent legal entity and none of them is exposed to liabilities incurred by the other parties. The contractual arrangements constitute valid and binding obligations of the parties of such agreements. Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC. On October 12, 2007, the Company entered into the following contractual arrangements with each of Dyeing and Electrical:
Consulting Services Agreement
. Pursuant to the exclusive consulting services agreements between Green Power and the Huayang Companies, Green Power has the exclusive right to provide to the Huayang Companies general business operation services, including advice and strategic planning, as well as consulting services related to the technological research and development of dyeing and finishing machines, electrical equipment and related products (the “ Services ”). Under this agreement, Green Power owns the intellectual property rights developed or discovered through research and development, in the course of providing the Services, or derived from the provision of the Services. The Huayang Companies shall pay a quarterly consulting service fees in Renminbi (“RMB”) to Fulland that is equal to all of the Huayang Companies’ profits for such quarter.
Operating Agreement
. Pursuant to the operating agreement among Green Power, the Huayang Companies and all shareholders of the Huayang Companies, Green Power provides guidance and instructions on the Huayang Companies’ daily operations, financial management and employment issues. The Huayang Companies shareholders must designate the candidates recommended by Green Power as their representatives on the boards of directors of each of the Huayang Companies. Green Power has the right to appoint senior executives of the Huayang Companies. In addition, Green Power agrees to guarantee the Huayang Companies’ performance under any agreements or arrangements relating to the Huayang Companies’ business arrangements with any third party. The Huayang Companies, in return, agree to pledge their accounts receivable and all of their assets to Green Power. Moreover, each of the Huayang Companies agrees that, without the prior consent of Green Power, it will not engage in any transactions that could materially affect its assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of their assets or intellectual property rights in favor of a third party or transfer of any agreements relating to their business operation to any third party. The term of this agreement, as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended only upon Green Power’s written confirmation prior to the expiration of the this agreement, with the extended term to be mutually agreed upon by the parties.
Equity Pledge Agreement
.
Under the equity pledge agreement between the Huayang Companies’ shareholders and Green Power, the Huayang Companies’ shareholders pledged all of their equity interests in the Huayang Companies to Green Power to guarantee the Huayang Companies’ performance of their respective obligations under the consulting services agreement. If the Huayang Companies or the Huayang Companies’ shareholders breach their respective contractual obligations, Green Power, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The Huayang Companies’ shareholders also agreed that, upon occurrence of any event of default, Green Power shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the Huayang Companies’ shareholders to carry out the security provisions of the equity pledge agreement and take any action and execute any instrument that Green Power may deem necessary or advisable to accomplish the purposes of the equity pledge agreement. The Huayang Companies’ shareholders agreed not to dispose of the pledged equity interests or take any actions that would prejudice Green Power’s interest. The equity pledge agreement will expire two years after the Huayang Companies’ obligations under the consulting services agreements have been fulfilled.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of presentation (continued)
Option Agreement
.
Under the option agreement between the Huayang Companies’ shareholders and Green Power, the Huayang Companies’ shareholders irrevocably granted Green Power or its designated person an exclusive option to purchase, to the extent permitted under PRC law, all or part of the equity interests in the Huayang Companies for the cost of the initial contributions to the registered capital or the minimum amount of consideration permitted by applicable PRC law. Green Power or its designated person has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement, as amended on November 1, 2008, is 20 years from October 12, 2007 and may be extended prior to its expiration by written agreement of the parties.
Pursuant to ASC Topic 810 and related subtopics related to the consolidation of variable interest entities, the accounts of the Huayang Companies are consolidated in the accompanying financial statements. As VIEs, the Huayang Companies’ sales are included in the Company’s total sales, its income from operations is consolidated with the Company’s, and the Company’s net income includes all of the Huayang Companies net income. The Company does not have any non-controlling interest and, accordingly, did not subtract any net income in calculating the net income of the VIEs that is attributable to the Company. Because of the contractual arrangements, the Company has a pecuniary interest in the Huayang Companies that requires consolidation of the Company’s and the Huayang Companies’ financial statements.
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates in 2013 and 2012 include the allowance for doubtful accounts, the allowance for obsolete inventory, the useful life of property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets and valuation of deferred tax assets, accruals for taxes due, and the value of stock-based compensation and warrant modification expense.
Cash and cash equivalents
|
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. The Company maintains cash and cash equivalents with various financial institutions mainly in the PRC and the U.S. As of December 31, 2013 and 2012, cash balances in banks in the PRC of $704,391 and $1,414,674, respectively, are uninsured.
Fair value of financial instruments
The Company adopted the guidance of ASC Topic 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair value of financial instruments (continued)
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
The following tables present information about equipment held for operating lease measured at fair value on a nonrecurring basis as of December 31, 2013 and 2012:
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance at
December 31,
2013
|
|
|
Loss
|
|
Equipment held for operating lease
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,751,206
|
|
|
$
|
4,751,206
|
|
|
$
|
2,573,256
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance at
December 31,
2012
|
|
|
Loss
|
|
Equipment held for sale
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,118,555
|
|
|
$
|
7,118,555
|
|
|
$
|
2,206,253
|
|
The Company conducted an impairment assessment on the equipment held for lease based on the guidelines established in ASC Topic 360 to determine the estimated fair market value of the equipment as of December 31, 2013 and 2012. Upon completion of its 2013 and 2012 impairment analysis, the Company determined that the carrying value exceeded the fair market value on equipment which is held for lease. Accordingly, for the years ended December 31, 2013 and 2102, the Company recorded an impairment loss of $2,573,256 and $2,206,253, respectively.
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, notes receivable, accounts receivable, inventories, advances to suppliers, prepaid VAT on purchases, deferred tax assets, prepaid expenses and other, short-term bank loans, bank acceptance notes payable, accounts payable, accrued expenses, capital lease obligations, advances from customers, VAT and service taxes payable and income taxes payable approximate their fair market value based on the short-term maturity of these instruments.
ASC Topic 825-10 “
Financial Instruments
” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
Concentrations of credit risk
The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Concentrations of credit risk (continued)
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. Substantially all of the Company’s cash is maintained with state-owned banks within the PRC, and none of these deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts. A significant portion of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.
At December 31, 2013 and 2012, the Company’s cash balances by geographic area were as follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Country:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
410,482
|
|
|
|
36.8
|
%
|
|
$
|
31,054
|
|
|
|
2.1
|
%
|
China
|
|
|
704,391
|
|
|
|
63.2
|
%
|
|
|
1,414,674
|
|
|
|
97.9
|
%
|
Total cash and cash equivalents
|
|
$
|
1,114,873
|
|
|
|
100.0
|
%
|
|
$
|
1,445,728
|
|
|
|
100.0
|
%
|
Restricted cash
Restricted cash consists of cash deposits held by a bank to secure bank acceptance notes payable.
Notes receivable represents trade accounts receivable due from customers where the customers’ bank has guaranteed the payment of the receivable. This amount is non-interest bearing and is normally paid within six months. Historically, the Company has experienced no losses on notes receivable. The Company’s notes receivable totaled $703,718 and $88,029 at December 31, 2013 and 2012, respectively.
Accounts receivable
Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection. During the year ended December 31, 2013, accounts with the amount of approximately $1,200,000 were written off after exhaustive efforts at collection with a corresponding debit to the allowance for doubtful account. The writes-offs of accounts receivable against the allowance for doubtful accounts only impact the balance sheet accounts.
During the year ended December 31, 2013, the Company has recovered and collected approximately $857,000 of accounts receivable for which the Company has previously reserved for as of December 31, 2012.
At December 31, 2013 and 2012, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amounts of $830,211 and $2,592,057, respectively.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories, consisting of raw materials, work in process and finished goods related to the Company’s products are stated at the lower of cost or market utilizing the weighted average method. An allowance is established when management determines that certain inventories may not be saleable. If inventory costs exceed expected market value due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the cost and the market value. These reserves are recorded based on estimates. The Company recorded an inventory reserve of $182,482 and $135,980 at December 31, 2013 and 2012, respectively.
Advances to suppliers
Advances to suppliers represent the cash paid in advance for the purchase of raw material from suppliers. The advance payments are intended to ensure preferential pricing and delivery. The amounts advanced under such arrangements totaled $695,254 and $593,104 as of December 31, 2013 and 2012, respectively.
Property and equipment
Property and equipment are carried at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Included in property and equipment is construction-in-progress which consisted of factory improvements and machinery pending installation and includes the costs of construction, machinery and equipment, and any interest charges arising from borrowings used to finance these assets during the period of construction or installation of the assets. No provision for depreciation is made on construction-in-progress until such time as the relevant assets are completed and ready for their intended use.
Equipment held for operating lease and related rental revenue
Long-lived assets are classified as held for operating lease when certain criteria are met. These criteria include: management’s commitment to a plan to lease the assets; the availability of the assets for immediate lease in their present condition; an active program to locate lessees and other actions to lease the assets has been initiated; the lease of the assets is probable and their transfer is expected to qualify for recognition as a completed operating lease within one year; the assets are being marketed at reasonable prices in relation to their fair value; and it is unlikely that significant changes will be made to the plan to lease the assets. We measure long-lived assets to be leased at the lower of carrying amount or fair value, less associated costs to lease.
At December 31, 2013, the Company reflected electro-slag re-melted (“ESR”) equipment that was used in 2010 and 2011 to produce forged products for the high performance components market as equipment held for operating lease on the accompanying consolidated balance sheets, which was originally classified as equipment held for sale at December 31, 2012. In March 2014, the Company signed an operating lease agreement related to the lease of such equipment for a period of eight years. Equipment held for operating lease is depreciated over its estimated useful life of eight years starting from the operating lease commencement date, April 1, 2014. Rental payments are recorded as revenue over the lease term as earned.
At December 31, 2013, the Company reclassified the prior year’s account of equipment held for sale to equipment held for operating lease in order to conform to the current year’s financial presentation.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. For the years ended December 31, 2013 and 2012, the Company incurred impairment charge in operations of $2,573,256 and $2,206,253, respectively, on the electro-slag re-melted equipment. The valuations of the ESR equipment which is held for lease pursuant to an operating lease, and the amounts of the impairment charge, were based on the impairment assessments conducted on ESR equipment at December 31, 2013 and 2012.
Advances from customers
Advances from customers at December 31, 2013 and 2012 amounted to $1,455,740 and $1,851,987, respectively, and consist of prepayments from customers for merchandise that had not yet been shipped. The Company will recognize the deposits as revenue as customers take delivery of the goods and title to the assets is transferred to customers in accordance with the Company’s revenue recognition policy.
Revenue recognition
Pursuant to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectability is reasonably assured. The Company recognizes revenues from the sale of dyeing and finishing equipment, forged rolled rings and other components upon shipment and transfer of title. The other elements may include installation and, generally, a one-year warranty. Equipment installation revenue is valued based on estimated service person hours to complete installation and is recognized when the labor has been completed and the equipment has been accepted by the customer, which is generally within a couple days of the delivery of the equipment. Warranty revenue is valued based on estimated service person hours to complete a service and generally is recognized over the contract period. For the years ended December 31, 2013 and 2012, amounts allocated to installation and warranty revenues were minimal. Based on historical experience, warranty service calls and any related labor costs have been minimal. All other product sales with customer specific acceptance provisions, including the forged rolled rings, are recognized upon customer acceptance and the delivery of the parts or service. Revenues related to spare part sales are recognized upon shipment or delivery based on the trade terms.
Income taxes
The Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. The Company accounts for income taxes using the liability method prescribed by ASC Topic 740, “
Income Taxes
.” Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes (continued)
The Company applied the provisions of ASC 740-10-50, “Accounting for Uncertainty in Income Taxes,” which provides clarification related to the process associated with accounting for uncertain tax positions recognized in our financial statements. Audit periods remain open for review until the statute of limitations has passed. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Company’s liability for income taxes. Any such adjustment could be material to the Company’s results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. As of December 31, 2013 and 2012, the Company had no uncertain tax positions, and will continue to evaluate for uncertain positions in the future.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment topic of ASC Topic 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The Financial Accounting Standards Board (“FASB”) also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company records compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated, based on the then current fair value, at each subsequent reporting date.
Shipping costs
Shipping costs are included in selling expenses and totaled $1,291,197 and $1,124,667 for the years ended December 31, 2013 and 2012, respectively.
Employee benefits
The Company’s operations and employees are all located in the PRC. The Company makes mandatory contributions to the PRC government’s health, retirement benefit and unemployment funds in accordance with the relevant Chinese social security laws. The costs of these payments are charged to the same accounts as the related salary costs in the same period as the related salary costs. Employee benefit costs totaled $217,513 and $186,010 for the years ended December 31, 2013 and 2012, respectively.
Advertising
Advertising is expensed as incurred and is included in selling, general and administrative expenses on the accompanying consolidated statements of income and comprehensive income and totaled $18,352 and $20,678 for the years ended December 31, 2013 and 2012, respectively.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Research and development
Research and development costs are expensed as incurred and are included in selling, general and administrative expenses. The costs primarily consist of raw materials and salaries paid for the development and improvement of the Company’s new dyeing machinery. Research and development costs totaled $92,803 and $0 for the years ended December 31, 2013 and 2012, respectively.
Foreign currency translation
The reporting currency of the Company is the U.S. dollar. The functional currency of the parent company is the U.S. dollar and the functional currency of the Company’s operating subsidiaries is the Chinese Renminbi (“RMB”). For the subsidiaries and affiliates, whose functional currencies are the RMB, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. The cumulative translation adjustment and effect of exchange rate changes on cash for the years ended December 31, 2013 and 2012 was $30,034 and $(3,732), respectively. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
All of the Company’s revenue transactions are transacted in the functional currency of the operating subsidiaries and affiliates. Other than for the purchase of equipment from non-Chinese suppliers, the Company does not enter into any material transaction in foreign currencies. Transaction gains or losses have not had, and are not expected to have, a material effect on the results of operations of the Company.
Asset and liability accounts at December 31, 2013 and 2012 were translated at 6.1104 RMB to $1.00 and at 6.31610 RMB to $1.00, respectively, which were the exchange rates on the balance sheet dates. Equity accounts were stated at their historical rate. The average translation rates applied to the statements of income for the years ended December 31, 2013 and 2012 were 6.1905 RMB and 6.31984 RMB to $1.00, respectively. Cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rate. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.
Reverse stock split
The Company effected a one-for-ten reverse stock split on March 6, 2012. All share and per share information has been retroactively adjusted to reflect this reverse stock split.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income per share of common stock
ASC Topic 260 “
Earnings per Share
,” requires presentation of both basic and diluted earnings per share (“EPS”) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common stock consist of common stock issuable upon the conversion of series A convertible preferred stock (using the if-converted method) and common stock purchase warrants (using the treasury stock method).
The following table presents a reconciliation of basic and diluted net income per share:
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Net income available to common stockholders for basic and diluted net income per share of common stock
|
|
$
|
8,185,577
|
|
|
$
|
4,198,580
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding – basic
|
|
|
3,210,791
|
|
|
|
2,538,246
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock
|
|
|
-
|
|
|
|
103,149
|
|
Warrants
|
|
|
-
|
|
|
|
7,648
|
|
Weighted average common stock outstanding– diluted
|
|
|
3,210,791
|
|
|
|
2,649,043
|
|
Net income per common share - basic
|
|
$
|
2.55
|
|
|
$
|
1.65
|
|
Net income per common share - diluted
|
|
$
|
2.55
|
|
|
$
|
1.58
|
|
The Company did not have any common stock equivalents at December 31, 2013 and 2012.
Related parties
Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions are recorded at fair value of the goods or services exchanged.
Comprehensive income
Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive income for the years ended December 31, 2013 and 2012 included net income and unrealized gains from foreign currency translation adjustments.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 1 –
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements
In July 2013, the Financial Accounting Standards Board issued ASU No. 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
, which concludes an unrecognized tax benefit should be presented as a reduction of a deferred tax asset when settlement in this manner is available under the tax law. The amendments are effective for reporting periods beginning after December 15, 2013. Early adoption is permitted. The Company does not expect the adoption of ASU No. 2013-11 will have a significant effect on its consolidated financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.
Reclassification
Certain reclassifications have been made in prior year same period’s consolidated financial statements to conform to the current period’s financial presentation.
NOTE 2 –
ACCOUNTS RECEIVABLE
At December 31, 2013 and 2012, accounts receivable consisted of the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Accounts receivable
|
|
$
|
16,065,074
|
|
|
$
|
12,670,680
|
|
Less: allowance for doubtful accounts
|
|
|
(830,211
|
)
|
|
|
(2,592,057
|
)
|
|
|
$
|
15,234,863
|
|
|
$
|
10,078,623
|
|
The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. After evaluating the collectability of individual receivable balances, the Company decreased the allowance for doubtful accounts in the amount of $1,825,180 and $46,672 for the year ended December 31, 2013 and 2012, respectively. During the year ended December 31, 2013, accounts with the amount of approximately $1,200,000 were written off after exhaustive efforts at collection with a corresponding debit to the allowance for doubtful account. The writes-offs of accounts receivable against the allowance for doubtful accounts only impact the balance sheet accounts.
During the year ended December 31, 2013, the Company has recovered and collected approximately $857,000 accounts receivable for which the Company has previously reserved for at December 31, 2012.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 3 -
INVENTORIES
At December 31, 2013 and 2012, inventories consisted of the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Raw materials
|
|
$
|
1,627,784
|
|
|
$
|
1,685,493
|
|
Work in process
|
|
|
1,778,650
|
|
|
|
2,602,990
|
|
Finished goods
|
|
|
1,509,606
|
|
|
|
1,745,052
|
|
|
|
|
4,916,040
|
|
|
|
6,033,535
|
|
Less: reserve for obsolete inventory
|
|
|
(182,482
|
)
|
|
|
(135,980
|
)
|
|
|
$
|
4,733,558
|
|
|
$
|
5,897,555
|
|
For the year ended December 31, 2013, the Company increased reserve for obsolete inventory in the amount of $41,381. For the year ended December 31, 2012, the Company decreased reserve for obsolete inventory in the amount of $37,882 as the part of reserved inventory in prior years had been sold out in 2012.
NOTE 4 -
PROPERTY AND EQUIPMENT
At December 31, 2013 and 2012, property and equipment consisted of the following:
|
|
Useful Life
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Office equipment and furniture
|
|
5 Years
|
|
|
$
|
156,810
|
|
|
$
|
222,853
|
|
Manufacturing equipment
|
|
5 – 10 Years
|
|
|
|
74,187,972
|
|
|
|
56,916,700
|
|
Vehicles
|
|
5 Years
|
|
|
|
129,380
|
|
|
|
125,167
|
|
Construction in progress
|
|
-
|
|
|
|
477,299
|
|
|
|
28,785
|
|
Building and building improvements
|
|
20 Years
|
|
|
|
21,487,286
|
|
|
|
20,785,597
|
|
|
|
|
|
|
|
|
96,438,747
|
|
|
|
78,079,102
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(25,843,609
|
)
|
|
|
(18,643,002
|
)
|
|
|
|
|
|
|
$
|
70,595,138
|
|
|
$
|
59,436,100
|
|
For the years ended December 31, 2013 and 2012, depreciation expense amounted to $6,704,386 and $6,519,394, respectively, of which $6,131,296 and $4,983,679, respectively, is included in cost of revenues and the remainder is included in operating expenses. Depreciation is not taken during the period of construction or equipment installation. Upon completion of the installation of manufacturing equipment or any construction in progress, construction in progress balances will be classified to their respective property and equipment category.
NOTE 5 –
LAND USE RIGHTS
There is no private ownership of land in China. Land is owned by the government and the government grants land use rights for specified terms. The Company’s land use rights have terms of 45 and 50 years and expire on January 1, 2053 and October 30, 2053. The Company amortizes the land use rights over the term of the respective land use right. For the years ended December 31, 2013 and 2012, amortization of land use rights amounted to $95,491 and $93,537, respectively. At December 31, 2013 and 2012, land use rights consisted of the following:
|
Useful Life
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Land use rights
|
45 - 50 years
|
|
$
|
4,418,826
|
|
|
$
|
4,274,916
|
|
Less: accumulated amortization
|
|
|
|
(632,775
|
)
|
|
|
(518,574
|
)
|
|
|
|
$
|
3,786,051
|
|
|
$
|
3,756,342
|
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 5 –
LAND USE RIGHTS (continued)
Amortization of land use rights attributable to future periods is as follows:
Years ending December 31:
|
|
Amount
|
|
2014
|
|
$
|
96,743
|
|
2015
|
|
|
96,743
|
|
2016
|
|
|
96,743
|
|
2017
|
|
|
96,743
|
|
2018
|
|
|
96,743
|
|
Thereafter
|
|
|
3,302,336
|
|
|
|
$
|
3,786,051
|
|
NOTE 6 –
EQUIPMENT HELD FOR OPERATING LEASE
The Company measures long-lived assets to be leased at the lower of carrying amount or fair value, less associated costs to lease these assets. As of December 31, 2012, the Company committed to a plan to sell ESR equipment that was used to produce forged products for the high performance components market. During the last quarter of 2013, the Company decided to lease the ESR equipment to a third party and various negotiation took place during such time through March 2014. In March 2014, the Company entered into an operating lease agreement with an eight-year term commencing April 1, 2014, with a third party (the “Lessee”), whereby the Lessee will lease the ESR equipment from the Company for quarterly lease payments of 1,450,000 RMB (approximately $234,000 per quarter). Accordingly, at December 31, 2013, the ESR equipment has been reflected as equipment held for operating lease on the accompanying consolidated balance sheets. At December 31, 2013 and 2012, the Company evaluated the ESR equipment for impairment. The Company compared the estimated fair values of the equipment to its carrying value with impairment indicators and recorded an impairment charge for the excess of carrying value over fair value. For the years ended December 31, 2013 and 2012, the Company recorded an impairment loss on ESR equipment in the amount of $2,573,256 and $2,206,253, respectively.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 7 –
SHORT-TERM BANK LOANS
Short-term bank loan represents an amount due to a bank that is due within one year. This loan can be renewed with the bank upon maturity. At December 31, 2013 and 2012, short-term bank loans consisted of the following:
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Loan from Agricultural and Commercial Bank, due on August 26, 2013 with annual interest rate of 6.90% at December 31, 2012, secured by certain assets of the Company and repaid on May 15, 2013.
|
|
$
|
-
|
|
|
$
|
474,977
|
|
|
|
|
|
|
|
|
|
|
Loan from Agricultural and Commercial Bank, due on May 9, 2014 with annual interest rate of 7.20% at December 31, 2013, secured by certain assets of the Company.
|
|
|
490,966
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan from Bank of Communications, due on May 8, 2013 with annual interest rate of 6.72% at December 31, 2012, repaid on due date.
|
|
|
-
|
|
|
|
316,651
|
|
|
|
|
|
|
|
|
|
|
Loan from Bank of Communications, due on May 12, 2013 with annual interest rate of 6.72% at December 31, 2012, repaid on due date.
|
|
|
-
|
|
|
|
474,977
|
|
|
|
|
|
|
|
|
|
|
Loan from Bank of China, due on January 16, 2013 with annual interest rate of 7.35% at December 31, 2012, secured by certain assets of the Company, repaid on due date.
|
|
|
-
|
|
|
|
949,953
|
|
|
|
|
|
|
|
|
|
|
Loan from Bank of China, due on March 1, 2014 with annual interest rate of 6.27% at December 31, 2013, secured by certain assets of the Company and repaid on due date (see note 16).
|
|
|
490,966
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan from Bank of China, due on March 4, 2014 with annual interest rate of 6.27% at December 31, 2013, secured by certain assets of the Company and repaid on due date (see note 16).
|
|
|
490,966
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan from Jiangsu Huishan Mintai Village Town Bank, due on July 15, 2014 with annual interest rate of 9.30% at December 31, 2013, secured by certain assets of the Company.
|
|
|
818,277
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan from Bank of Communications, due on April 21, 2014 with annual interest rate of 6.72% at December 31, 2013.
|
|
|
327,312
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Loan from Bank of Communications, due on April 23, 2014 with annual interest rate of 6.72% at December 31, 2013.
|
|
|
490,966
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total short-term bank loans
|
|
$
|
3,109,453
|
|
|
$
|
2,216,558
|
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 8 –
BANK ACCEPTANCE NOTES PAYABLE
Bank acceptance notes payable represent amounts due to a bank which are collateralized. All bank acceptance notes payable are secured by the Company’s restricted cash which is on deposit with the lender. At December 31, 2013 and 2012, the Company’s bank acceptance notes payables consisted of the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Bank of China, non-interest bearing, due on January 4, 2014, collateralized by 100% of restricted cash deposited.
|
|
$
|
81,828
|
|
|
$
|
-
|
|
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on February 23, 2014, collateralized by 100% of restricted cash deposited.
|
|
|
327,311
|
|
|
|
-
|
|
Jiangsu Huishan Mintai Village Town Bank, non-interest bearing, due on April 15, 2014, collateralized by 100% of restricted cash deposited.
|
|
|
163,655
|
|
|
|
-
|
|
Bank of China, non-interest bearing, due on May 12, 2014, collateralized by 100% of restricted cash deposited.
|
|
|
81,828
|
|
|
|
-
|
|
Bank of Communications, non-interest bearing, due on January 3, 2014, collateralized by 100% of restricted cash deposited.
|
|
|
32,731
|
|
|
|
-
|
|
Total
|
|
$
|
687,353
|
|
|
$
|
-
|
|
NOTE 9 -
CAPITAL LEASE OBLIGATION
In 2011, the Company entered into a non-cancelable capital lease agreement with expiration date of June 3, 2014. The asset and liability under the capital lease are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The asset and future obligations related to the capital lease are included in the accompanying consolidated balance sheets in property and equipment and capital lease obligations, respectively. The Company paid off the capital lease obligation in the third quarter of 2013. At December 31, 2013 and 2012, capital lease obligations consisted of the following:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Capital lease obligation - current portion
|
|
$
|
-
|
|
|
$
|
251,413
|
|
Capital lease obligation - long-term portion
|
|
|
-
|
|
|
|
132,756
|
|
|
|
$
|
-
|
|
|
$
|
384,169
|
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 10 –
INCOME TAXES
The Company accounts for income taxes pursuant to the accounting standards that require the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. Additionally, the accounting standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets, including those related to the U.S. net operating loss carry forwards and to the temporary differences related to the deduction of impairment losses in PRC for income tax purposes as compared to financial statement purposes, are dependent upon future taxable income during the periods in which those temporary differences become deductible or are utilized.
Net deferred tax asset related to the U.S. net operating loss carry forward has been fully offset by a valuation allowance. The Company is governed by the Income Tax Law of the PRC and the U.S. Internal Revenue Code of 1986, as amended. Under the Income Tax Laws of PRC, Chinese companies are generally subject to an income tax at an effective rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments. The Company’s VIEs (Dyeing and Electric) and the Company’s subsidiary, Fulland Wind Energy, are subject to these statutory rates. The Company’s wholly-owned subsidiary, Fulland Limited was incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, this entity is not subject to income taxes.
Cleantech Solutions International, Inc. was incorporated in the United States and has incurred an aggregate net operating loss of approximately $5,426,000 for income tax purposes through December 31, 2013, subject to the Internal Revenue Code Section 382, which places a limitation on the amount of taxable income that can be offset by net operating losses after a change in ownership. The net operating loss carries forward for United States income taxes, and may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, through 2033. Management believes that the realization of the benefits from these losses appears not more than likely due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. Management will review this valuation allowance periodically and make adjustments as necessary.
The Company has cumulative undistributed earnings from its foreign subsidiaries of approximately $60 million and $51 million as of December 31, 2013 and 2012, respectively, which is included in the consolidated retained earnings and will continue to be indefinitely reinvested in the Company’s PRC operations. Accordingly, no provision has been made for any deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.
The table below summarizes the differences between the U.S. statutory federal rate and the Company’s effective tax rate for the years ended December 31, 2013 and 2012:
|
|
2013
|
|
|
2012
|
|
U.S. statutory rates
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
U.S. effective rate in excess of China tax rate
|
|
|
(9.6
|
)%
|
|
|
(10.4
|
)%
|
Other
|
|
|
0.0
|
%
|
|
|
1.4
|
%
|
U.S. valuation allowance
|
|
|
2.4
|
%
|
|
|
3.8
|
%
|
Total provision for income taxes
|
|
|
26.8
|
%
|
|
|
28.8
|
%
|
For the years ended December 31, 2013 and 2012, income tax expense related to our operations in the PRC and amounted to $2,999,795 and $1,701,602, respectively.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 10 –
INCOME TAXES (continued)
The tax effects of temporary differences under the Income Tax Law of the PRC that give rise to significant portions of deferred tax assets and liabilities as of December 31, 2013 and 2012 are as follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net U.S. operating loss carry forward
|
|
$
|
1,844,921
|
|
|
$
|
1,571,055
|
|
Loss on impairment of equipment
|
|
|
1,222,216
|
|
|
|
551,890
|
|
Allowance for doubtful accounts and inventory reserve
|
|
|
253,173
|
|
|
|
-
|
|
Total gross deferred tax assets
|
|
|
3,320,310
|
|
|
|
2,122,945
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(1,844,921
|
)
|
|
|
(1,571,055
|
)
|
Net deferred tax assets
|
|
$
|
1,475,389
|
|
|
$
|
551,890
|
|
The valuation allowance at December 31, 2013 and 2012 were $1,844,921 and $1,571,055, respectively, related to the U.S. net operating loss carry forward. During 2013, the valuation allowance was increased by approximately $274,000 from the prior year.
In assessing the ability to realize the deferred tax asset from the loss on impairment of equipment held for lease in PRC and allowance for doubtful accounts and inventory reserve, management considers whether it is more likely than not that some portion or the entire deferred tax asset will be realized. The Company concluded that the temporary difference on the impairment loss of equipment held for lease in PRC and allowance for doubtful accounts and inventory reserve will be deductible or utilized on the future PRC taxable income and a deferred tax asset of $1,475,389 and $551,890 has been set up at December 31, 2013 and 2012, respectively.
NOTE 11 –
STOCKHOLDERS’ EQUITY
(a)
Preferred stock issued for warrants modification
On February 7, 2012, in an effort to induce its warrant holder to exercise their warrants, the Company signed an agreement with Barron Partners LP (“Barron”), pursuant to which Barron, as the holder of warrants to purchase 55,158 shares of common stock at $12.00 per share and 165,000 shares of common stock at $16.98 per share, agreed to exchange or convert such warrants into (i) 2,201,582 shares of the Company’s series A preferred stock which are convertible into 73,386 shares of common stock, and (ii) warrants to purchase 73,386 shares of this Company’s common stock at $2.70 per common share, with the proceeds from the exercise of the warrants being used to pay expenses incurred by the Company in connection with its public company expenses. In connection with the warrant modification, the Company valued the 2,201,582 series A preferred shares issued at fair market value on the date of grant of $197,408 based on the 73,386 common shares issuable upon conversion of the series A preferred stock multiplied by the quoted trading price of the common stock on the grant date of $2.70 per share. In connection with the transaction, on February 7, 2012, the Company revalued the fair market value of the original warrants by using the Black-Scholes option-pricing model. The total fair market value of the original warrants was estimated to be $52,896 on February 7, 2012. The fair market value of the newly issued exchanged warrants was estimated to be $90,621 using the Black-Scholes option-pricing model. In connection with the Black-Scholes option pricing calculation, the following weighted-average assumptions were used: stock price of $2.70; expected dividend yield 0%; risk-free interest rate of 0.15%; volatility of 139.58% and an expected term of 0.77 year. The Company recorded the difference between the fair market value of original warrants of $52,896 and the fair market value of exchanged warrants of $90,621 which amounted to $37,725 as a warrant modification expense with a corresponding credit of additional paid-in capital. Accordingly, for the year ended December 31, 2012, the Company recorded an aggregate warrant modification expense of $235,133
on the accompanying consolidated statement of income. For the year ended December 31, 2013, the Company did not record any warrant modification expense.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 11 –
STOCKHOLDERS’ EQUITY (continued)
(b)
Common stock issued for services
During the year ended December 31, 2012, the Company issued a total of 121,053 shares of common stock pursuant to its 2010 long-term incentive plan, of which 250 shares were issued to a director, 35,000 shares were issued to the chief executive officer, 28,403 shares were issued to the chief financial officer and 57,400 shares were issued to other employees and consultants. These shares were issued for services rendered through December 31, 2012, which had been accounted for as stock-based compensation and for services to be rendered during 2013, which had been accounted for as prepaid expense at December 31, 2012. The shares were valued at the fair market value on the date of grant. During the year ended December 31, 2012, the Company recorded stock-based compensation of $159,881 and prepaid expense of $281,265, which was amortized in 2013.
On July 29, 2013, the Company issued a total of 30,000 shares of common stock pursuant to its 2010 long-term incentive plan, of which 8,000 shares were issued to the chief executive officer’s wife, who the Company employs in its sales department, 8,000 shares were issued to the chief financial officer and 14,000 shares were issued to other employees. The shares were valued at the fair market value on the grant date, and the Company recorded stock-based compensation of $157,200 in 2013.
(c)
Common stock issued upon conversion of preferred stock
During the year ended December 31, 2012, the Company issued 439,912 shares of common stock upon the conversion of 13,197,389 shares of series A preferred stock. As of December 31, 2013 and 2012, the Company had no preferred stock outstanding and all authorized shares of preferred stock were without designation as to series.
(d)
Common stock sold for cash
On November 28, 2012, the Company sold 157,966 shares of its common stock to its chief executive officer and his wife for $612,903, representing the market price on November 28, 2012, the date of the stock purchase agreement.
On June 18, 2013, the Company sold 428,398 shares of common stock at a purchase price of $4.50 per share. The shares were sold pursuant to a prospectus supplement dated June 18, 2013 to the Company’s registration statement on Form S-3. The Company did not engage a placement agent with respect to the sale. The Company paid a fee of 10% and a non-accountable expense allowance of 2%, for a total of $154,745, to an individual in connection with sales made to investors introduced to the Company by this individual who is not a U.S. citizen or resident. The net proceeds received by the Company from the sale of the shares were approximately $1,768,000.
On July 10, 2013, the Company sold a total of 150,518 shares of common stock at a price of $4.70 per share to an investor. The shares were issued pursuant to a prospectus supplement for the Company’s registration statement on Form S-3. The Company paid a fee of 10% and a non-accountable expense allowance of 2%, for a total of $84,892, to an individual in connection with sales made to investors introduced to the Company by this individual who is not a U.S. citizen or resident. The net proceeds received by the Company from the sale of the shares were approximately $620,000.
(e)
Common stock issued for exercise of warrants
During the year ended December 31, 2012, the Company issued 73,386 shares of its common stock upon the exercise of warrants, for which the Company received cash proceeds of $198,142. As of December 31, 2013 and 2012, there were no warrants outstanding.
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 11 –
STOCKHOLDERS’ EQUITY (continued)
(f)
Warrants
The Company did not have any warrant activity for the year ended December 31, 2013. Warrant activities for the year ended December 31, 2012 were summarized as follows:
|
|
Year Ended December 31, 2012
|
|
|
|
Number of
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
Balance at beginning of year
|
|
|
220,158
|
|
|
$
|
15.73
|
|
Issued
|
|
|
73,386
|
|
|
|
2.70
|
|
Exercised
|
|
|
(73,386
|
)
|
|
|
(2.70
|
)
|
Cancelled
|
|
|
(220,158
|
)
|
|
|
(15.73
|
)
|
Balance at end of year
|
|
|
-
|
|
|
$
|
-
|
|
Warrant exercisable at end of year
|
|
|
-
|
|
|
$
|
-
|
|
(g)
2010 Long-Term Incentive Plan
|
In January 2010, the Company’s board of directors adopted, and in March 2010, the stockholders approved the Company’s 2010 long-term incentive plan, which covers 200,000 shares of common stock. In October 2013, the Company’s board of directors adopted, and in December 2013, the stockholders approved, an amendment to the 2010 long-term incentive plan to increase the number of shares of common stock subject to the plan, to 500,000 shares. The plan provides for the grant of incentive and non-qualified options and stock grants to employees, including officers, directors and consultants. The plan is to be administered by a committee of not less than three directors, each of whom is to be an independent director. In the absence of a committee, the plan is administered by the board of directors. Members of the committee are not eligible for stock options or stock grants pursuant to the plan unless such stock options or stock grant are granted by a majority of the Company’s independent directors other than the proposed grantee. As of December 31, 2013, the Company had issued a total of 177,991 shares of common stock under the plan.
NOTE 12–
STATUTORY RESERVES
The Company is required to make appropriations to reserve funds, comprising the statutory surplus reserve, statutory public welfare fund and discretionary surplus reserve, based on after-tax net income determined in accordance with generally accepted accounting principles of the PRC (the “PRC GAAP”). Appropriation to the statutory surplus reserve should be at least 10% of the after tax net income determined in accordance with the PRC GAAP until the reserve is equal to 50% of the entities’ registered capital or members’ equity. As of December 31, 2012, the Company appropriated the required maximum 50% of its registered capital to statutory reserves for Dyeing and Electric, accordingly, no additional statutory reserve is required for the year ended December 31, 2013. As of December 31, 2013, the Company had not appropriated the required maximum 50% of its registered capital to statutory reserve for Fulland Wind Energy.
For the years ended December 31, 2013 and 2012, statutory reserve activities were as follows:
|
|
Dyeing
|
|
|
Electrical
|
|
|
Fulland Wind Energy
|
|
|
Total
|
|
Balance – December 31, 2011
|
|
$
|
72,407
|
|
|
$
|
1,168,796
|
|
|
$
|
823,348
|
|
|
$
|
2,064,551
|
|
Addition to statutory reserves
|
|
|
300,641
|
|
|
|
-
|
|
|
|
114,546
|
|
|
|
415,187
|
|
Balance – December 31, 2012
|
|
|
373,048
|
|
|
|
1,168,796
|
|
|
|
937,894
|
|
|
|
2,479,738
|
|
Addition to statutory reserves
|
|
|
-
|
|
|
|
-
|
|
|
|
264,982
|
|
|
|
264,982
|
|
Balance – December 31, 2013
|
|
$
|
373,048
|
|
|
$
|
1,168,796
|
|
|
$
|
1,202,876
|
|
|
$
|
2,744,720
|
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 13 –
SEGMENT INFORMATION
For the years ended December 31, 2013 and 2012, the Company operated in two reportable business segments - (1) the manufacture of forged rolled rings and related components for the wind power and other industries segment, which also includes the manufacture of the Company’s solar industry products, and (2) the manufacture of dyeing and finishing equipment segment. The Company’s reportable segments are strategic business units that offer different products. They are managed separately based on the fundamental differences in their operations. All of the Company’s operations are conducted in the PRC.
Information with respect to these reportable business segments for the years ended December 31, 2013 and 2012 was as follows:
|
|
2013
|
|
|
2012
|
|
Revenues:
|
|
|
|
|
|
|
Forged rolled rings and related components
|
|
$
|
33,775,849
|
|
|
$
|
31,940,931
|
|
Dyeing and finishing equipment
|
|
|
38,336,813
|
|
|
|
25,258,290
|
|
|
|
|
72,112,662
|
|
|
|
57,199,221
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
Forged rolled rings and related components
|
|
|
4,355,417
|
|
|
|
5,077,390
|
|
Dyeing and finishing equipment
|
|
|
2,348,969
|
|
|
|
1,442,004
|
|
|
|
|
6,704,386
|
|
|
|
6,519,394
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Forged rolled rings and related components
|
|
|
141,324
|
|
|
|
239,974
|
|
Dyeing and finishing equipment
|
|
|
159,057
|
|
|
|
65,685
|
|
|
|
|
300,381
|
|
|
|
305,659
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
Forged rolled rings and related components
|
|
|
3,244,455
|
|
|
|
1,359,449
|
|
Dyeing and finishing equipment
|
|
|
5,747,096
|
|
|
|
3,737,787
|
|
Other (a)
|
|
|
(805,974
|
)
|
|
|
(898,656
|
)
|
|
|
|
8,185,577
|
|
|
|
4,198,580
|
|
Identifiable long-lived tangible assets at December 31, 2013
and 2012 by segment:
|
|
|
|
|
|
|
|
|
Forged rolled rings and related components
|
|
$
|
43,987,670
|
|
|
$
|
40,636,142
|
|
Dyeing and finishing equipment
|
|
|
26,607,468
|
|
|
|
18,799,958
|
|
Equipment held for operating lease (b)
|
|
|
4,751,206
|
|
|
|
7,118,555
|
|
|
|
$
|
75,346,344
|
|
|
$
|
66,554,655
|
|
Identifiable long-lived tangible assets at December 31, 2013
and 2012 by geographical location:
|
|
|
|
|
|
|
|
|
China
|
|
$
|
75,346,344
|
|
|
$
|
66,554,655
|
|
United States
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
75,346,344
|
|
|
$
|
66,554,655
|
|
(a)
|
The Company does not allocate any general and administrative expenses of its U.S. activities to its reportable segments, because these activities are managed at a corporate level.
|
(b)
|
The Company does not allocate the equipment held for operating lease to any operating segment.
|
CLEANTECH SOLUTIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 14 –
CONCENTRATIONS
Customers
No customer accounted
for 10% or more of the Company’s revenues during the years ended December 31, 2013 and 2012.
Suppliers
The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s purchases for the years ended December 31, 2013 and 2012.
|
|
Years Ended December 31,
|
Supplier
|
|
2013
|
|
2012
|
A
|
|
27%
|
|
21%
|
B
|
|
*
|
|
12%
|
C
|
|
*
|
|
18%
|
* Less than 10%.
The largest supplier accounted for 10.2% of the Company’s total outstanding accounts payable at December 31, 2013. The three largest suppliers accounted for 18.7% of the Company’s total outstanding accounts payable at December 31, 2012.
NOTE 15 –
RESTRICTED NET ASSETS
Regulations in the PRC permit payments of dividends by the Company’s PRC VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Subject to certain cumulative limit, a statutory reserve fund requires annual appropriations of at least 10% of after-tax profit, if any, of the relevant PRC VIE’s and subsidiary. Dyeing and Electric had reached the cumulative limit as of December 31, 2012 and 2013, respectively. The statutory reserve funds are not distributable as cash dividends. As a result of these PRC laws and regulations, the Company’s PRC VIE’s and its subsidiary are restricted in their abilities to transfer a portion of their net assets to the Company. Foreign exchange and other regulations in PRC may further restrict the Company’s PRC VIEs and its subsidiary from transferring funds to the Company in the form of loans and/or advances.
As of December 31, 2013 and 2012, substantially all of the Company’s net assets are attributable to the PRC VIE’s and its subsidiary located in the PRC. Accordingly, the Company’s restricted net assets at December 31, 2013 and 2012 were approximately $90,291,000 and $77,514,000, respectively.
NOTE 16 –
SUBSEQUENT EVENTS
In March 2014, the Company repaid short-term loan from Bank of China in the principal amount of $490,966, and borrowed the same amount from Bank of China. The new loan bears interest rate at 6.27% per annum and is due on February 16, 2015.
In March 2014, the Company repaid short-term loan from Bank of China in the principal amount of $490,966, and borrowed the same amount from Bank of China. The new loan bears interest rate at 6.27% per annum and is due on February 18, 2015.
In March 2014, the Company entered into an operating lease agreement whereby the Company leased its ERS equipment to a third party for a period of eight year, effective April 1, 2014 (See Note 6).